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The new “reverse charge” system of VAT accounting affects sub-contractors supplying their services to main contractors in the construction sector.

Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain are no longer invoiced in the normal way. Under the new reverse charge system, the sub-contractor does not show VAT on their invoice to the main contractor and does not account for output VAT on that transaction.

The new reverse charge applies to activities covered by the construction industry scheme (CIS) payment rules. So if Eddie the Electrician does £10,000 of work for Big Builder Ltd after 1 March he no longer shows VAT on his invoice. Big Builder Ltd will record £2,000 (20%) as input tax and output tax. Note that normal VAT invoices will continue to be issued to domestic customers and end-users.

Please contact us if you need help understanding this new system. Note also that if you are a sub-contractor using the VAT flat rate scheme it may be beneficial to leave that scheme as you may be entitled to a VAT refund on your expenses from 1 March 2021.